Converting Term to Whole Life

Term Life Insurance Conversion

Term life insurance is temporary coverage that usually lasts between 10 – 30 years. With a term life insurance conversion option, shoppers can convert their term policy to a permanent policy. In this post, we’ll go over everything you’ll need to know about converting term to whole life insurance. 

PROS

You're able to transition from temporary coverage to lifetime coverage

CONS

Your premiums will be more expensive compared to your original term policy

Convertible Life Insurance

What does converting term to whole life insurance even mean? Should I convert my term life to whole life? These are two of the most frequent questions we get about converting life insurance.

You already know that Term Life is temporary life insurance. Term conversion simply means you can convert some or the entire term policy to a permanent policy. Permanent life insurance provides coverage for your entire life. Most term policies are convertible term life insurance policies. This means they can “change” or convert to a permanent policy.

Whole life insurance is just one type of permanent life insurance. Other types of permanent policies include universal life, indexed universal life, guaranteed universal life…and more. Permanent life insurance is simply a “category” for life insurance policies that can cover your for your entire life.  

Some term life insurance policies also allow conversion to a permanent life policy at different stages of your policy.

When Can I Convert My Policy?

Your life insurance conversion period is the deadline for converting your term life policy. The deadline and the type of permanent coverage that is available will depend on the life insurance company. Every company is different in what products are available as well as the conversion deadline.

Examples of Company Conversion Times

 

How does term life conversion work?

Here’s a quick example: 

Let’s say Mr X has a 30-year term policy with ABC Life Insurance company. ABC’s conversion period for their 30-year term says that Mr X must convert during the first 20 years of the term.

Seven years into his contract, Mr X develops cancer or some other health condition. Is his term life insurance convertible to permanent life? …Yes!

Since he is still within the 20-year conversion period, Mr X may convert his policy to any of ABC’s conversion options. Mr X will not need to take an exam to qualify and can have the same coverage amount.

If Mr X was unable to convert his policy, he would run the risk of outliving his term policy. With his diagnosis of cancer, he may now be uninsurable. If he can buy a new policy, the rates may be astronomical due to his preexisting health condition.

What is a term life insurance conversion credit?

Some life insurance companies will offer a term life insurance conversion credit on their policies. This means that they will provide a discount if you convert your term life policy to one of their permanent life policies. 

This discount will lower your life insurance premium for the 1st year. This is usually done by taking your term policy’s premium amount for that year and deducting it from the permanent policy’s 1st year’s payment. Not every life insurance company will offer conversion credit.

Top 7 Reasons why converting term to whole life makes sense

1. You’ll probably outlive your term life policy

Term life polices are great in that they’re affordable. Their biggest risk is that it’s temporary coverage and your beneficiaries may never get a dime if you outlive the policy. If you convert life insurance from term to whole life, your dependents are guaranteed to receive a death benefit. 

2. You’re Rich!

Well, maybe you aren’t rich, but perhaps you’re simply better off than when you first purchased your term life policy. Remember, whole life insurance will cost more and some people just can’t afford it. Even when you’re healthy, the premiums are more expensive than term. If you have health problems – it’s even more expensive. 

Most people have more money as they age. Sometimes this is a perfect scenario to convert your term life policy to a permanent policy.  You may have wanted a permanent policy when you were younger and now you can afford it. 

Check to see if your conversion allows you the option to convert all or some of your term policy. Remember to only convert the coverage coverage that you will need for lifetime coverage. 

3. Estate Taxes and Planning

If you’re doing very well financially, you’ll want to know that your heirs may be responsible for paying estate taxes after you have died. With a permanent whole life policy, the death benefit can be used to to pay your estate taxes.

Every state is different, but federal estate taxes were applied to any estate over $5.49 million per person or $10.98 million per couple in 2017. Just know that your spouse won’t owe estate taxes from an inheritance from their deceased spouse.

4. You have lifelong financial dependents

You may have loved ones or dependents that will need financial assistance when you die. Your permanent policy can be thought of as a savings account that can be used to care for your dependents. This is frequently used for dependents with special needs or require medical care. Your whole life or permanent policy can fund a trust for your dependent. Always seek out help form an attorney or financial advisor whose specialty is with special needs. They’ll help you with setting up a trust and choosing the right policy.

5. You’re In Poor Health

This is a big one because your health will not make or break your ability to convert to a permanent policy. Life insurance companies won’t look at your current health at the time of conversion. It’s quite common for someone to develop an adverse health conditions during the term length of their term life policy. Just know that you can still take advantage of converting the term to whole life even with health issues.

You won’t need to take a medical exam and you’ll probably get the same health class rating you received when you bought your term policy.

6. Your permanent policy premiums are level for life

Your permanent life insurance premium will be locked in and the same for your entire life. You’ll pay the same premium and won’t have to be concerned about rate increases or switching policies like you did with term.

7. Cash Value Growth

Part of your permanent life insurance premium is put into a savings account that builds cash value. It isn’t quick, but its growth is tax deferred. You can borrow and use the permanent policy’s cash value anyway you want. This provides you a great financial resource in case an emergency occurs. This feature is not available with a term life policy. 

With that said, it’s not always a good idea to withdraw cash from your permanent policy unless you have no other funding options. The reason is because if you want to cash out your entire policy – you may be subjected to fees if you’re in the “surrender charge period.” The surrender charge period will depend on the company. A better strategy is to use your permanent policy as a tax free savings policy for your beneficiaries. You also should incorporate a sound investment strategy because permanent policies aren’t a substitute for proper retirement planning. Don’t purchase permanent life insurance unless you in it for the long term. It typically takes many years to grow significant cash reserves.

Related: Top 10 Cash Value Whole Life Companies

How to Figure If Converting Term to Whole Life Is Best

We hope we’ve answered your questions about how to convert term life insurance to whole life. If you have any questions about converting term life insurance, conversion options or anything else – give us a call. 

At Life Insurance Blog, we help people everyday with their life insurance needs. We’d be happy to assist you too. Contact us if you need help figuring out if can you convert term life insurance to whole life or some other permanent product.

We look forward to helping you.

Michael Quinn

Michael Quinn

Michael Quinn is the owner of Life Insurance Blog. Please email or call us at 888-411-1329. We're here to answer your questions & help you get the best policy available.

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